By Cavus & Coskunsu, Istanbul.
After marathon litigation running for the last four years, the Supreme Court ruling on TOF arbitration marks the end of an era for salvage cases in the Turkish Straits, reports Istanbul law firm Cavus & Coskunsu.
Turkish Open Form (TOF) is an internationally recognised form of salvage agreement although its use is almost exclusively limited to salvage operations in the Turkish Straits and other areas where the Directorate General of Coastal Safety (the "Salvors"), the Turkish state-owned salvors, has monopoly rights in salvage matters. TOF started out as a state-sponsored form of agreement whose provisions were extremely pro-salvor. The real value of TOF for the Salvors has been its arbitration clause, which was famous for provisions where arbitrators were entitled to receive 10-12 per cent of each award they gave depending on the number of arbitrators in a tribunal. However, the problem for shipowners and underwriters was that only the Salvors had the power to initiate arbitration proceedings and considering the usually excessive securities put up in favour of the Salvors, owners and underwriters were left with little alternative but to settle salvage claims that were often excessive compared with the merits of the salvage claim. Therefore in many cases the use of TOF inevitably meant a distorted settlement.
The SC SARA
The particular incident leading to the Supreme Court ruling on TOF occurred in November 2007 when, in heavy weather, the SC SARA, a crude oil tanker of 57,346 gross tons that was in anchored position off Bozcaada Island without cargo on board, asked for tug assistance for towage since it was reported the weather would shortly deteriorate. However, two tug boats owned by the Salvors (enjoying monopoly rights in the area) informed the master of SC SARA that a towage service would not be provided and that the tugs would be able to provide salvage services on the condition that a TOF was first signed. The master refused to sign the TOF and the tugs did not proceed further. Later the weather conditions worsened and under the pressure of the circumstances that night the master again asked for tug assistance. By this time the vessel's predicament was grave and out of necessity the master had no other choice but to sign the TOF.
Despite the fact that the TOF was signed, no service could be carried out by the tugs since they could not work in the weather conditions and consequently the SC SARA ran aground. When the weather improved the tugs were able to attend and delivered services to the vessel lasting just over an hour. Shortly after the services were completed, attorneys acting for the Salvors applied to the Court of Bozcaada for an arrest order against the vessel for USD 13 million (an amount alleged by the Salvors to be 20 per cent of the market value of the SC SARA).
Since the TOF was applicable and the Salvors had received a bank guarantee for USD 13 million, the Salvors claimed a salvage reward of around USD 5 million. However given the facts of the case the claim made by the Salvors was so excessive there was no realistic possibility to reach a reasonable settlement. The owners commenced proceedings before the Specialized Maritime Court of Istanbul, as it was then, to determine the salvage remuneration and to claim for damages allegedly caused by the Salvors' tugs during the operation. The Specialized Maritime Court of Istanbul, acceding to the objection raised by the Salvors, dismissed the action on the grounds of the mandatory arbitration clause in the TOF.
Clause 6.4 of TOF states that
"Where an amicable settlement cannot be reached between the parties the dispute related with the determination of the salvage award arising from the salvage service rendered to the property salved then the dispute shall if demanded by the SALVOR be resolved by reference to arbitration in Istanbul within the legal period." (our emphasis)
The owners appealed and the ruling of the Specialized Maritime Court of Istanbul was successfully challenged in the appeal where the Supreme Court unanimously set aside the ruling, stating that the arbitration clause was invalid on the following grounds:
1. The arbitration clause was incompatible with the principles of access to legal remedies ensured by the Turkish Constitution as well as Art. 6 of the European Convention on Human Rights, since the clause granted the right to commence arbitration exclusively to the Salvors. The Supreme Court stated that the local court's ruling on dismissal of the claim on the grounds of jurisdiction, citing an allegedly valid arbitration clause, automatically deprived the shipowner from pursuing its remedy since the Salvors had not commenced arbitration.
2. The arbitration clause, by granting the right to commence arbitration solely to one party and so depriving the other party of the power to commence legal proceeding by any means, was regarded as an asymmetric (unilateral) arbitration clause and as such was held to be null and void in accordance with contemporary jurisprudence.
The Supreme Court, by holding the arbitration clause to be entirely invalid, did not examine in detail the provisions relating to arbitrators' fees as a percentage of the award given.
The 1st Specialized Maritime Court of Istanbul decided to comply with the Supreme Court's ruling; by so doing the judgment has set a binding precedent for the courts in Turkey. The lower court could have referred the appeal court's ruling to the Civil General Council of the Supreme Court as the very highest appellate authority in Turkey, but chose not to do so.
This is a welcome result for stakeholders in both ship and cargo who will now be able to rely upon the Turkish courts to grant reasonable salvage awards based upon the true merits of the salvage operation even in cases where the TOF is applicable.
The new Turkish Commercial Code that will come into force on 1st July 2012 substantially codifies the provisions of the 1989 Salvage Convention. Turkey now applies modern principles of salvage law and in light of the recent TOF ruling there is now an opportunity for TOF to be reviewed and amended by the Salvors in a way that it develops into an internationally acclaimed form of agreement.
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